What are they used for?
Long-term care planning. The most common use in New York. A properly structured irrevocable trust — often an income-only trust — can hold assets so they are not countable for Medicaid, provided it was established and funded more than five years before the application. See Medicaid Planning Advisory.
Protecting the home. The house is usually the largest asset and the one families most want to preserve. A trust can hold it while permitting you to continue living there.
Estate tax planning. Relevant where an estate approaches New York’s exclusion threshold, particularly given the cliff.
Providing for a beneficiary who cannot manage funds. Including a beneficiary receiving needs-based benefits — see Special & Supplemental Needs Trusts.
What you give up
Worth stating without softening.
You cannot take the assets back on your own. Limited flexibility can be built in — the ability to change beneficiaries, a trust protector, retained income rights — and with the agreement of the trustee and the beneficiaries a trust can sometimes be modified or unwound. What it cannot be is a decision you make alone.
You are not the trustee. Someone else administers the trust. Choosing that person is among the more consequential decisions in the plan.
Timing is unforgiving. The five-year look-back means a trust created when care is already needed generally does not achieve the Medicaid objective. Planning done early works. Planning done in a crisis has fewer options.
There are tax consequences to weigh. How the trust is drafted affects income taxation, and whether assets receive a step-up in basis at death. Getting this wrong can cost beneficiaries more than the trust saved.
Execution requirements in New York
A lifetime trust must be in writing and executed with formality — signed and acknowledged by the person creating it and by the trustee, before a notary or with witnesses.
As with a will, the formality is not a technicality. A defectively executed trust may not do what it was meant to do at exactly the moment it is being relied upon.
Frequently asked questions
What is the difference between a revocable and an irrevocable trust?
A revocable trust can be changed or cancelled and provides no asset protection. An irrevocable trust generally cannot be undone by the person who created it, which is why it can protect assets from creditors and from long-term care costs.
Can I live in my house if it is in an irrevocable trust?
Typically yes, where the trust is drafted to permit it. The arrangement has to be structured carefully, and the Medicaid consequences depend on the specific terms.
How long before I need care should I set up a trust?
More than five years, because of the Medicaid look-back. Later is still worth discussing, but the options narrow considerably.
Can an irrevocable trust ever be changed?
Sometimes. With the agreement of the trustee and the beneficiaries, an irrevocable trust can in some cases be modified or unwound. It cannot be changed unilaterally by the person who created it, and flexibility is best built in at the drafting stage.
Does this firm handle Medicaid applications?
No. The firm advises on planning and drafting and refers application work to counsel who handle it.
Related: Estate Planning Advisory · Wills · Powers of Attorney · back to Estate Planning
Written by Dale Riedel, Esq. · Admitted in New York, Bar No. 5837539